New Financial Products – Part I: Ally’s Raise Your Rate CD

Have you seen the ads for Ally Bank’s “Raise Your Rate” CD? Basically, it’s a 2 year CD with a yield (1.74%) that’s already above well above that offered by the competition (Citi, for example, offers .65%: 65 bps, on a 2 year CD – you have to go to 5 years to get a 1.75% yield from Citi!).

What’s the catch? The catch is supposedly in your favor too! The “Raise Your Rate” clause means that, should rates rise, you can, at any time, once and only once, reset your rate to the then-current rate. In other words, should something crazy happen and CD rates spike to 5%, you can say “SHIP IT – I want 5%” and get your rate re-struck to the higher yield.

Now, I ask you, the readers, how do they do this? How do they offer a premium yield as well as a free option for the CD buyer? I asked Ally if there was a prospectus or term sheet available, and was told that you get the details in the mail after you sign up.

Anyone have ideas? I think it’s extremely unlikely that rates will rise over this time period, but that’s not material to the discussion – Ally is offering a premium rate and a free option. HOW?

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